Stock Picks: Best Buy, Google, Palm, Railroads

Wall Street analyst opinions on stocks making headlines in Friday's market

Best Buy Co.: Goldman Sachs analyst Matthew Fassler raised a rating on shares of Best Buy Co. (BBY) to buy from neutral on Mar. 19.

In making the rating change on the world's largest electronics retailer, Fassler cited the current consumer electronics product cycle and a macroeconomic recovery, and said the stock trades at one of the lowest valuation multiples in hardlines retailing, "even on trailing earnings after the worst year for consumer spending in recent memory".

Other, incremental catalysts for the stock cited by Fassler included an upward revision to TV sales forecasts; and better consumer electronics retail sales in last week's government report for February, which he said reduced risk to fourth-quarter earnings per share (EPS).

Fassler said he was inching his EPS estimates higher: for 2010, by 6 cents to $3.33; and for 2011, by 5 cents to $3.53, all on "slightly higher" sales.

He also raised a 12-month price target on the shares to $47 from $44.

Google Inc.: Standard & Poor's equity analyst Scott Kessler reiterated a buy opinion on shares of Google Inc. (GOOG) on Mar. 19

China Business News reported on Mar. 19 that the search engine may pull out of China on April 10, citing an unidentified Chinese sales agent for the company. Google may announce its exit on Mar. 22, the Shanghai-based newspaper reported, citing an unidentified Google China employee. It may also reveal plans for its China workforce on the same day, according to the report.

The company hasn't confirmed the April 10 date for its pullout, the newspaper cited the sales agent as saying. Tokyo-based spokeswoman for the company, Jessica Powell, declined to comment on the report.

In a posting on the S&P MarketScope service, Kessler said Google shares had been active and lower in pre-market trading on Mar. 19 after the China Business Daily report was cited in a Bloomberg News story.

"We expect Google to extricate itself from this market, and note these operations accounted for less than 1% of revenues in 2009, based on our calculations," said Kessler.

The analyst said he thinks Google has been negotiating with the Chinese government to try to retain a presence in the country with other offerings and R&D operations; Kessler sees "a 50/50 chance" of this occurring.

Palm Inc.: Kaufman Bros. analyst Shaw Wu lowered a rating on shares of Palm Inc. (PALM) to sell from hold on Mar. 19.

Shares of Palm, creator of the Pre smartphone, dropped as much as 17% in early U.S. trading after the company forecast sales this quarter that were less than half of analysts' estimates.

Revenue in the period ending in May will be less than $150 million, Chief Financial Officer Doug Jeffries said on Palm's Mar. 18 third-quarter conference call, compared with the $300 million average of estimates compiled by Bloomberg. The company also reported its 11th straight quarterly loss.

In a Mar. 19 note, Wu said that he sees potential risk for the shares to fall to $3. "We are unsure of PALM's prospects as an ongoing concern" he said. The analyst sees three scenarios: the company gets sold but the deal could be a "take-under"; Palm needs to raise more capital; or it "runs out of money".

Wu said his view is that the company will not likely see profitability until "four to six quarters out, or perhaps longer". He said Palm was able to push out an $80 million to $90 million cash burn by a quarter, but he forecasts a potential cash burn of $150 million to $160 million for the current May quarter. "We believe its net cash position could decline to $50 million from the $205 million it is today," Wu said.

Palm reported a "mixed" February quarter, said the analyst, with revenues of $366 million better than its preannounced range of $300 million to $320 million, but the EPS loss worse at 61 cents vs. the Wall Street consensus estimate of a loss of 42 cents. Smart phone units shipped were "fairly strong" at 960,000, noted Wu, vs. reduced expectations of approximately 825,000 to 850,000 units.

Wu said Palm issued "shockingly lower" guidance for the May quarter. "We find this disturbing as there have been signs of better sell-through at [Verizon Wireless], due to better efforts, but apparently still not enough".

The analyst expects fiscal 2010 revenue of $1.2 billion and an EPS loss of $1.75, vs. his earlier estimates of $1.4 billion and an EPS loss of $1.15. For fiscal 2011, he sees $1.05 billion in revenue and an EPS loss of $1.25, vs. his prior forecasts of $1.7 billion and an EPS loss of 40 cents.

CSX Corp., Canadian National Railway Co., Norfolk Southern Corp.: Stifel Nicolaus analyst John Larkin raised price targets for three major railroad companies he follows on Mar. 19: to $64 from $60 for Norfolk Southern Corp. (NSC); to $58 from $51 for CSX Corp. (CSX); and to $65 from $60 for Canadian National Railway Co. (CNI).

He rates each stock buy.

In a note, Larkin said the upward revisions to the price targets on the three stocks were primarily driven by upward revisions to EPS estimates that now reflect more favorable volumes and better margins than he was previously projecting. He said he increased 2010, 2011, and 2012 EPS estimates an average of 2.9%, 3.6%, and 5.2%, respectively, for the five Class I rail companies that Stifel Nicolaus follows.

"[W]e believe that operating margins should be positively impacted by the operating leverage embedded in the companies' business models as the rails should not have to add back costs on a one-to-one basis with revenue growth in a recovering economy," the analyst wrote.

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